Delaware District Court Dismisses Appeal by Creditors’ Committee After Case is Converted from Chapter 11 to Chapter 7

The Bankruptcy Code provides for the appointment of a creditors’ committee in chapter 11 bankruptcy cases. See 11 U.S.C. § 1102. There is no parallel provision applicable to chapter 7 cases. When a bankruptcy case is converted from chapter 11 to chapter 7 while the creditors’ committee is pursuing an appeal, what happens to that appeal? In In re Constellation Enterprises LLC, Civ. No. 17-757-RGA, 2018 U.S. Dist. LEXIS 47153 (D. Del. Mar. 22, 2018), the United States District Court for the District of Delaware held that such an appeal should be dismissed because the appellant, the creditors’ committee, had been dissolved by the conversion.

In May 2016, the debtors filed for relief under chapter 11. In September 2016, the debtors and the creditors’ committee moved for approval of a settlement. After the Supreme Court ruling in Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), the bankruptcy court denied approval of the settlement, rejecting the arguments of the creditors’ committee that the settlement proposal did not fall within the holding of Jevic. On May 30, 2017, the committee appealed the settlement denial. Shortly thereafter, on June 23, 2017, the debtors, who had not appealed the settlement denial, moved to convert their chapter 11 cases to chapter 7 cases. Over the objections of the creditors’ committee, the bankruptcy court granted the conversion effective October 2, 2017. The creditors’ committee appealed this order as well.

The United States Trustee and other interested parties moved to dismiss both appeals, arguing that, upon conversion of the underlying cases to chapter 7, the creditors’ committee was dissolved and no longer had the capacity to appeal. The Trustee pointed to case law about corporations providing that the dissolution of a corporation terminates all litigation involving that corporation. The creditors’ committee responded by arguing that the underlying conversion order was improper, that even if it were proper the Bankruptcy Code does not require dissolution of the committee upon conversion, and that a bylaw amendment it enacted transferring its rights to an ad hoc committee of its former members sufficed to preserve the appeal even if the committee was dissolved.

The district court agreed with the Trustee. First, the court held that the committee was dissolved when the cases were converted to chapter 7. It pointed to section 103(g) of the Bankruptcy Code, which provides that the sections providing authority for the creation and powers of a creditors’ committee are applicable only in chapter 11 cases. It also noted numerous statements in other cases that suggest that dissolution occurs upon conversion. The creditors’ committee cited a First Circuit case, In re SPM Manufacturing Corp., 984 F.2d 1305 (1st Cir. 1993), where the court resolved an appeal by a chapter 11 creditors’ committee post-conversion, but the district court noted that no party had raised the issue and rejected the idea that the First Circuit had resolved the issue implicitly. The district court distinguished a second case cited by the creditors’ committee, In re Lyons Transportation Lines, Inc., 162 B.R. 460 (Bankr. W.D. Pa. 1994), where the bankruptcy court had permitted a creditors’ committee to survive post-conversion to provide its views to the trustee. In that case, the district court noted, the bankruptcy court had wanted the special expertise of the creditors’ committee because of the complexity of the issues, a consideration not present here.

Second, the district court rejected the committee’s argument that due process required permitting the committee to appeal a conversion order that the creditors’ committee saw as procedurally improper. It noted that any creditor could have appealed the settlement denial or the conversion order, but none had chosen to do so. It likewise rejected the committee’s argument that conversion should not be approved where it would interfere with a pending appeal, noting that such a rule would open up “another avenue for potential gamesmanship and abuse in the proceedings.” In re Constellation Enterprises LLC, 2018 U.S. Dist. LEXIS 47153 at *21.

Third, the district court rejected the committee’s position that a valid transfer of rights had occurred by means of a committee bylaw purporting to reconstitute itself as an ad hoc committee in the event a court ruled it dissolved. The district court ruled that no provision in the Bankruptcy Code permitted the transfer of the committee’s rights or duties to another entity, and that such a transfer is impossible because the interests of the committee, as an entity created by statute to represent the interests of a class of creditors, are distinct from the interests of the committee members in their personal capacities.

Having rejected the committees’ arguments, the district court dismissed the appeals.